The global gas price convergence

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Capital Economics has a nice note out this morning on global gas price convergence. On the supply side:

Based on current projections, Australia’s output of LNG will grow from a provisional 21m tonnes in 2013 to 82m tonnes by 2019. The country will overtake Qatar as the world’s largest producer.

Less certain, but equally ambitious, are US LNG export plans. Assuming that the seven projects that have received EPA approval do eventually move to the production stage, US LNG exports could reach 78m tonnes per year by 2020.

Meanwhile Russia is also pushing to increase its LNG export capabilities. We have pencilled in up to 15m tonnes per year from Yamal LNG from 2017.

Other large potential suppliers include Canada and East Africa. However, in both cases the proposed projects face infrastructural challenges.

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This is a fair enough conservative approach to potential supply. It is likely that more projects will come on stream in Canada, Africa and the US but given the limited number of global players that can actually pull off big greenfields expansions, we can expect a more measured pace beyond 2020.

CE also notes there are risks to US expansions, largely political, but a hard-nosed analysis suggest these will largely apply to greenfields proposals as well.

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There are also pipeline risks to supply expansions, for instance those running from Russia and Central Asia to China, which deliver gas far cheaper than via LNG. Also, global shale gas could out (or under) perform expectations.

On the demand side, CE sees:

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Growth in global regasification capacity is outpacing the growth in LNG supply. Our calculations suggest that capacity will increase to 825m tonnes by 2020, from 721m tonnes currently. There will be particularly strong growth in consumption in South-east Asia (which as a region has failed to develop an interconnected energy framework), China and in Latin America. (See Chart 5.)

Although these numbers suggest that the global market will remain in deficit, LNG capacity is often underutilised. In many countries, LNG is not used in base-load operations, instead being used to fill gaps in energy supply. In particular, it provides back up for variable renewable resources such as hydropower and wind. By way of example, drought conditions in Brazil are leading to higher uptakes of LNG this year. It can also act as a counterweight to politically motivated supply outages. This has been in the news recently with the threat of disruption to Russian gas supplies to Europe. Of course, there are exceptions: LNG is an integral part of Japan’s energy mix and the country is by far the largest single market.

Over the medium term, CE sees European prices falling to $10mmbtu, US prices rising to $6mmbtu and Asian prices falling below $15mmbtu. In short, some convergence. I see a little more but the base case is right.

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Even this leaves Australia’s magnificent expensive seven (with break evens $13-$14) at very tight margins for oil and gas.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.